The Giovanni Company purchased a tooling machine in 2002 for $120,000. The machine was being depreciated by the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2012, after 10 years of use, Giovanni paid $20,000 to overhaul the machine. Because of this improvement, the machine's estimated useful life would be extended an additional 5 years. What would be the depreciation expense recorded for the above machine in 2012?

Question

Quizplus · Accepted Answer

The machine was originally estimated to have a useful life of 20 years with no salvage value, so the annual depreciation expense would be:

($120,000 cost - $0 salvage value) / 20 years = $6,000 per year

However, after 10 years of use, Giovanni paid $20,000 to overhaul the machine which extended its useful life by an additional 5 years. This means that the machine now has a total useful life of 20 + 5 = 25 years.

To calculate the new annual depreciation expense, we need to divide the remaining book value of the machine after the overhaul ($120,000 - $60,000 = $60,000) by the remaining useful life of the machine (25 - 10 = 15 years):

$60,000 / 15 years = $4,000 per year

Therefore, the depreciation expense recorded for the machine in 2012 would be $4,000. However, it's important to note that in future years the annual depreciation expense would be $4,000 until the end of the 25-year useful life.

The Giovanni Company Purchased a Tooling Machine in 2002 for $120,000